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Measuring Scope 4 emissions: what boards need to know

By Jessica Tasman-Jones

This article is brought to you by Agenda, an FT Specialist publication that focuses on corporate boards

A global reporting standard that seeks to measure “avoided carbon emissions” is gaining in popularity, despite its complexity.

Scopes 1, 2 and 3, set by the Greenhouse Gas Protocol, are the accounting standards used by most UK companies and governmental bodies to measure direct and indirect carbon emissions. The largest UK companies must include data for Scopes 1 and 2 in their annual reports.

In recent years a new voluntary metric for avoided emissions, known as Scope 4, has gained in popularity. It covers emission reductions that “occur outside a product’s life cycle or value chain but as a result of the use of that product,” says the World Resources Institute, which established the GHG Protocol.

Some companies already include avoided emissions in their reporting.

Aveva, a FTSE 100 tech company, plans to develop a baseline and target for customer-saved and avoided emissions “sometimes referred to as Scope 4” by 2025, according to its 2022 annual report.

America’s Pacific Gas & Electric Company recently issued a climate strategy report that referred to Scope 4, while Telefonica of Spain and Renew Energy Global of India are among groups to have disclosed specific figures for avoided emissions.

In 2019 the WRI introduced a framework to cover the measurement and disclosure of GHG emissions that stem from a product or service, including avoided emissions.

All 350 companies tracked by the WRI came up with avoided-emissions data by measuring “the difference in total life cycle GHG emissions between a company’s product and some alternative product that provides an equivalent function”.

Reporting on avoided emissions can give a company a competitive advantage if it is able to show that its goods or services are the most environmentally friendly, says Alan McGill, partner for sustainability and climate change at PwC.

However, most boards will have enough to do with applying Scopes 1, 2 and 3 without having to consider avoided emissions, says McGill.

The difficulties of measuring avoided emissions is another barrier. “While you can measure your product or service in terms of its footprint and carbon emissions associated with its use, how do you compare it to the rest of the products in the marketplace?” McGill says.

New products come to market all the time so keeping up to date is a challenge, he says. Companies often only have access to industry averages, which makes ranking difficult.

Products that are likely to improve an avoided-emissions score include “low-temperature detergents, fuel-saving tyres, energy-efficient ball bearings and teleconferencing services”, says the WRI.

McGill says the logistics sector is one area where Scope 4 has gained traction as transport companies vie to report on lorries’ fuel efficiency and so reduce the carbon footprint of deliveries.

Despite the benefits of helping customers to reduce emissions through products and services, experts say sceptical stakeholders may view avoided emissions as greenwash, especially if a company features these numbers more prominently than Scopes 1, 2 and 3 emissions.

“When [companies] focus more on avoided emissions, there is a risk of greenwashing because they are not disclosing the full picture,” says Tiffany Kulasekare, senior sustainability consultant at Rio ESG, a software company that specialises in sustainability.

Avoided emissions should be reported separately and should not be used to adjust Scopes 1, 2 or 3 emissions, says Tatiana Boldyreva, associate director for climate change at CDP, a not-for-profit that helps companies to disclose their effect on the environment.

Reporting of avoided emissions is best used to inform product or policy design rather than as an indication of climate mitigation efforts, says Boldyreva.

Avoided emissions should not count towards near-term or long-term emission reduction targets, according to Science-Based Targets Initiative, an organisation that promotes best practice.

They do not count as a reduction of a company’s Scopes 1, 2 and 3 inventories and should be excluded from net-zero reporting, according to the SBTi’s corporate net-zero standard.

The WRI says companies should first calculate and report Scopes 1, 2 and 3 emissions before calculating and disclosing an avoided emissions figure.

Many organisations remain stuck on Scope 3, which examines emissions along the value chain rather than directly from the company, says McGill. It includes 15 categories for companies to measure, such as purchased goods and services, fuel and energy-related activities, business travel, employee commuting and franchises.

McGill expects companies to increase measurement and reporting of Scope 3 over the next five years, helped by more rigorous standards from the Task Force on Climate-related Financial Disclosures and International Sustainability Standards Board, two international standard-setting bodies. As that reporting evolves, more organisations will use Scope 4, he says.

Shareholders may also drive demand for Scope 4 reporting. ISS, the proxy adviser, allows investors and companies to assess the potential avoided emissions of investments covering more than 250 companies. Some investment firms, such as Schroders, also include avoided emissions in investment analyses.

Impact investors, who seek positive social or environmental outcomes from their investments, often include avoided emissions as a metric when determining the value of a company, Kulasekare says.

Scopes 1, 2 and 3 treat climate change mitigation as a risk to be managed by limiting exposure to emissions regulation, says Seb Beloe, head of research at WHEB Asset Management, an impact investor. Scope 4 examines the business opportunity from products and services that reduce emissions.

This article is based on a piece written by Lindsay Frost for Agenda.

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